How do changes in US real yields impact asset classes? How do changes in US real yields impact asset classes? How do changes in US real yields impact asset classes?

How do changes in US real yields impact asset classes?

Equities 5 minutes to read
Peter Garnry

Head of Saxo Strats

Summary:  Negative US real yields have been argued is the main reason why equities are rallying despite weak economic data, but that narrative is not the full picture. Our analysis shows that equities get very sensitive to large changes in US real yields and that it drives large positive returns in US equities. In other words, equities have historically been a good hedge against large changes in US real yields. This means that we are less worried about equities should US real yields creep higher again. The biggest casualties would most likely be gold, EUR and JPY.


Last week we wrote about low US real yields and their a priori impact on growth stocks. From a theoretical perspective low interest rates causes an exponential impact on market valuation of companies with a stable growth trajectory and low variance in future cash flows. We used Microsoft as an example to show how the market was increasingly pricing technology stocks as bond proxies. In today’s research note we broaden our analysis of US real yields and show how they impact asset classes but also how sensitivity changes for technology stocks depending on the changes in real yields.

The average response shows no link between rising equities and falling real yields

When we measure daily changes in the US 10-year real yield (US 10-year yield minus US 10-year breakeven yield) against a variety of asset classes we observe the expected sensitivities to changes in the real yield. When the real yields decline gold rises, USDJPY declines and EURUSD increases. Equities across the board have a positive sensitivity to changes in the real yield which fits with the hypothesis that rising real yields are a positive sign for economic growth and thus equity values.

Source: Bloomberg and Saxo Group

Many would argue that it does not fit if they overlay the inverse real yield with the NASDAQ 100 Index. But the reason why cannot do that is that US real yields is not a stationary time series since 1999 and thus this method would be flawed. We are left with analysing changes in the US 10-year real yield and daily changes in asset classes.

Source: Bloomberg and Saxo Group

It is all in the tails

Instead of only measuring the average response between change in the US real yield and daily changes in asset classes, which is what we are doing in a correlation analysis, we can do a quantile regression and measure the sensitivity across the entire distribution of US real yield changes. Our hypothesis has been that plunging real yields have driven up long duration assets such as gold, growth stocks and real estate. As the plot of our quantile regression fit of daily changes in NASDAQ 100 against daily changes in the US 10-year real yield shows, the sensitivity to changes in the real yield is almost twice as large in the tails (both positive and negative) compared to when real yields are hardly moving. This means that when the US real yield is changing a lot it has a large impact on the daily returns in the NASDAQ. In both cases it leads to higher positive daily returns in NASDAQ 100 which makes equities an unique asset class relative to changes in the real yield compared to other asset classes.

Source: Bloomberg and Saxo Group

In other words, the persistent decline in the US 10-year real yield over the past 60 trading sessions is what is likely driving some of the gains we are observing. Outside the regimes of larges changes in the US real yield the NASDAQ 100 is driven by the underlying expectation for profit growth and other factors.

Source: Bloomberg and Saxo Group

In the case we see a reversal in the US real yield we would expect gold, JPY and EUR to come under pressure, but also high yield corporate bonds. Depending on the size of the move equities could hold the line except many in some of the most speculative segments of the equity market.

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-gb/legal/disclaimer/saxo-disclaimer)

Saxo Markets
40 Bank Street, 26th floor
E14 5DA
London
United Kingdom

Contact Saxo

Select region

United Kingdom
United Kingdom

Trade Responsibly
All trading carries risk. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more
Additional Key Information Documents are available in our trading platform.

Saxo Markets is a registered Trading Name of Saxo Capital Markets UK Ltd (‘SCML’). SCML is authorised and regulated by the Financial Conduct Authority, Firm Reference Number 551422. Registered address: 26th Floor, 40 Bank Street, Canary Wharf, London E14 5DA. Company number 7413871. Registered in England & Wales.

This website, including the information and materials contained in it, are not directed at, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in the United States, Belgium or any other jurisdiction where such distribution, publication, availability or use would be contrary to applicable law or regulation.

It is important that you understand that with investments, your capital is at risk. Past performance is not a guide to future performance. It is your responsibility to ensure that you make an informed decision about whether or not to invest with us. If you are still unsure if investing is right for you, please seek independent advice. Saxo Markets assumes no liability for any loss sustained from trading in accordance with a recommendation.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc. Android is a trademark of Google Inc.

©   since 1992